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Stop digging…

Well known adage: When you find yourself in a hole stop digging.

Yves Smith has posted an interesting tidbit on how the bailout of Wall Street may (will?) simply divert needed capital from useful productive purposes – which feed, clothe, house us all – to buying toxic assets in order to rescue the friends of Washington.

It is amazing given the dire warnings of the economic impact of the credit crunch on ordinary American, that the governement should choose just this time to make it worse by shoveling what little credit is available to bail out its dependents in the very biggest banks.

Oh, no it isn’t – I forgot.

It was already clear, if Washington takes $700 billion dollars to bailout Wall Street investment bankers, fewer options would be left for a fiscal stimulus package in a slowing economy with rising unemployment?

But, according to this reading the situation will be far worse than that:

When money is tight, however, as it is likely to be for some time, withdrawing $700bn from the funding pool to support failed, past investments has a more serious effect on the economy, because capital flows are restricted by market illiquidity and investor trepidation. If that reduces asset prices, it exposes more loans to losses. If it prevents good investments by crowding them out of any chance of getting funding, it reduces economic activity. Either way, it makes the economy less efficient.

So whatever economic dislocation is looming on the horizon, the bailout plan which will be passed tonight by the Congress – having been larded with enough pork to keep a family of 100 million well fed for a year – will actually make things worse by generating more paper losses and cutting off credit to the very sectors of the real economy the Greek chorus of the plan’s supporters claim will be saved, and make it more difficult to stimulate the economy.

All the traditional tools available to government having been gobbled up in the circus of idiots, the only hope for a smooth, controlled collapse of the sixty year old debt bubble is to immediately reduce the work week to 16 hours, eliminate all taxes on working families, and abrogate all debts foreign and domestic – immediate action is required, because once this thing begins to unravel, economic collapse will follow swiftly.

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